Monday, October 23, 2017

‘Wolf of Wall Street’ Warns ICOs are ‘Biggest Scam Ever’

Jordan Belfort, the former penny-stock broker whose penny stock scamming was the focus of the film, The Wolf of Wall Street, has dismissed the current craze for initial coin offerings as “the biggest scam ever” that is bound to “blow up in . . . people’s faces,” reportsThe Financial Times.

So far this year, 202 ICOs have raised just over $3bn, according to Coinschedule.com

Belfort, who spent 22 months in prison after pleading guilty to securities fraud and money-laundering, drew parallels to the fashion for “blind pools” in the 1970s and 80s, when companies raised funds from investors without specifying how the money would be spent. Many pools were dissolved without making a single investment — but not before brokers made off with big fees.

“Promoters [of ICOs] are perpetuating a massive scam of the highest order on everyone,” he said. “Probably 85 per cent of people out there don’t have bad intentions, but the problem is, if five or 10 per cent are trying to scam you, it’s a f**king disaster,” according to FT.

“Everyone and their grandmother wants to jump in right now,” he said. “I’m not saying there’s something wrong with the idea of cryptocurrencies, or even tulip bulbs. It’s the people who will then get involved and bastardise the idea.”

An unregulated means by which funds are raised for a new cryptocurrency venture. An Initial Coin Offering (ICO) is used by startups to bypass the rigorous and regulated capital-raising process required by venture capitalists or banks. In an ICO campaign, a percentage of the cryptocurrency is sold to early backers of the project in exchange for legal tender or other cryptocurrencies, but usually for Bitcoin...

When a cryptocurrency startup firm wants to raise money through an Initial Coin Offering (ICO), it usually creates a plan on a whitepaper which states what the project is about, what need(s) the project will fulfill upon completion, how much money is needed to undertake the venture, how much of the virtual tokens the pioneers of the project will keep for themselves, what type of money is accepted, and how long the ICO campaign will run for. During the ICO campaign, enthusiasts and supporters of the firm’s initiative buy some of the distributed cryptocoins with fiat or virtual currency. These coins are referred to as tokens and are similar to shares of a company sold to investors in an Initial Public Offering (IPO) transaction. If the money raised does not meet the minimum funds required by the firm, the money is returned to the backers and the ICO is deemed to be unsuccessful. If the funds requirements are met within the specified timeframe, the money raised is used to either initiate the new scheme or to complete it.

ICOs are similar to IPOs and crowdfunding. Like IPOs, a stake of the startup or company is sold to raise money for the entity’s operations during an ICO operation. However, while IPOs deal with investors, ICOs deal with supporters that are keen to invest in a new project much like a crowdfunding event. But ICOs differ from crowdfunding in that the backers of the former are motivated by a prospective return in their investments, while the funds raised in the latter campaign are basically donations. For these reasons, ICOs are referred to as crowdsales.

Block & Leviton LLP, a Boston-based law firm, confirms there is an official investigation on behalf of Tezos ICO investors...

After raising US$230 million in funding through its ICO, things started to unravel for Tezos. Not only is the trading of tokens delayed indefinitely, there is also a beef between the project’s foundation and the actual founders. It is evident this matter will not be resolved amicably any time soon, which only brings more negative attention to this particular project. With the new investigation underway, things will only heat up even more...

[T]his investigation seems to hint that the Tezos ICO violated securities laws and regulations. If that is the case, things will soon go from bad to worse for this project and all its investors.